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LAST OCTOBER, just before the stock market crash, one Peter G. Peterson had an article in the Atlanticthat caused a lot of talk on commuter trains. Peterson was President Nixon’s Secretary of Commerce in 1972. He astutely left the Cabinet the following year, and since has been an investment banker as well as a tireless agitator in the press and on TV. He was as responsible as anyone for the 1983 boost in Social Security taxes and the partial tax on Social Security benefits. He continues to talk darkly about “entitlements,” to warn that universal medical care will be the death of us, and to plead for a tax on consumption.

After reading Peterson’s article, I started to do a column on what’s wrong with it, but it would have taken a year’s worth of this space. One sentence has nevertheless kept nagging at me. I quote: “We now know, for instance, that a maximum tax of 50 per cent actually generates more revenue from the wealthy than a maximum rate of 70 per cent, and provides real incentives for budding entrepreneurs.” This claim was in furtherance of the claim that it would be a mistake to ask the wealthy to pay for their share of the deficit. It calls to mind an Artemus Ward saying I have cited before: “It ain’t so much the things we don’t know that get us in trouble. It’s the things we know that ain’t so.”

By an aberration of my W. C. Fields like filing system, I can lay my hands on one, but only one, set of old tax instructions. We can make do, however; it’s the top bracket Peterson is talking about, so we’ll talk about that too. When we mention the incomes of the wealthy, we’ll mean just the part of their incomes that is taxed at the top rate-70 per cent or 50 per cent, as the case may be.

It will be convenient to have a standard of wealth. Peterson doesn’t give one, but let’s guess that to count as wealthy in his book, one has to have $200,000 in the top bracket.

We also need some ground rules. I’ll name two: (1) The differences we’re going to consider will not have anything to do with tax shelters, because Peterson speaks only about the tax rate, and anyhow shelters are greatly restricted by the new law; and (2) inflation won’t have anything to do with our calculations either. We want a level playing field, as the Wall Street Journal would say.

Now, as I read Peterson, he seems to be saying that if you take all the $200,000-and-up incomes as above defined, add them together, and tax them at 50 per cent, you will collect more taxes than you would if you taxed them at 70 per cent. That’s too preposterous for anyone to believe; surely Peterson must have meant something else. Let’s explore the possibilities, for he seems to think he’s hit upon a great social truth.

We’ll start with a little algebra. We will call x the amount taxed at 70 per cent, and y the amount taxed at 50 per cent. Then if taxes paid in the two years are equal, our equation would be .7Ox = .50y. Solving the equation for y, we have y = .70x/.50, or l.4x. In other words, the amount taxed at 50 per cent would have to be at least two-fifths greater than the amount taxed at 70 per cent.

The mathematics is unimpeachable, but perhaps Peterson is focusing on something different. Low rates are often said to take the incentive out of cheating on taxes. I’m no economic determinist, so I don’t hold with that. Indeed, in spite of recent studies funded by the IRS, I’ll stand right up and say that half of the wealthy taxpayers are honest. And why not? As the chorus sings in Iolanthe, “Hearts just as pure and fair/May beat in Belgrave Square/ As in the lowly air/Of Seven Dials.” Then for every honest wealthy taxpayer who reported an income of $200,000 in both years, there would have to have been a wealthy cheat whose income was really $360,000, who didn’t report $160,000 of it when the rate was 70 per cent, but who cheerfully reported it all when the rate fell. In that way, the wealthy as a class would report 1.4 times as much at the lower rate as at the higher, and the total taxes paid by them would remain the same.

Is Mr. Peterson telling us that many of the wealthy are dishonest? And if he believes that, does he believe the cheaters would suddenly become honest once the marginal rate dropped? Having spent even a year in Nixon’s Cabinet, he can’t believe that. To quote Iolanthe again: “In for a penny, in for a pound.”

Let’s try another approach. It has been said at least since the New Deal days that high taxes sap the incentive of producers to produce. After a certain point, they are supposed to get tired of working for Uncle Sam; so they quit working, or maybe take longer lunch hours. This is thought to be bad for everyone because these people are, by definition anyway, the most productive among us. We should try to get them working again by allowing them to hold on to more of what they get their hands on.

To keep a level playing field, we’ll consider only what is called earned income, for increased interest or dividends or rents would go also to remittance men, who know nothing of incentives since they do nothing anyhow. To be sure, our big- time producers are used to getting much of their income from stock options and such, but the 1986 law, by taxing capital gains as ordinary income, has largely eliminated that particular incentive.

Although the morals are slightly different, the mathematics of the incentive argument is the same as the mathematics of the cheating argument. So I ask: Does Peterson mean that our can-do people will increase their doings by 40 per cent just because the tax rate has been cut? Does he want us to believe that they’re doing whatever it is they do without half trying? Does he think it honorable of them to have done this (quoting Iolanthe yet again) “By taking a fee with a grin on [their] face/When [they] haven’t been there to attend to the case”? Or put it this way: If they lack incentive to do what they’re supposed to, why don’t they get out of the way and let someone else do it?

Well, I’ll make another guess at what Mr. Peterson meant. Maybe he’s saying the incentive of a lowered tax rate will boost thousands of people from the $150,000 class to the $200,000 class, which would now have more members and consequently a higher total income.

This explanation is more plausible than the others, and there actually was a highly unrepresentative sample of its possible effect in the sports pages of the Times the other day. Last year, when the tax on the wealthy was, well, too complicated for me to explain, there were five ballplayers with annual wages in excess of $2 million. This year, when the rate is somehow lower, there are 10 in the golden circle. With twice as many making $2 million, their rate could fall in half, and the total taxes paid by those poor chaps would remain about the same. Is this what Mr. Peterson meant?

If so, he didn’t mean much. The five new boys were all making well over a million last year; so it took only raises of a few hundred thousand to double the number of players in the $2 million bracket and thus double the taxes paid by the superstars. This is what is known, among less exalted players, as bracket creep and is mostly due to inflation, which we agreed to rake out of our playing field.

BUT IT DOESN’T really make any difference what reason Peterson gives for the behavior of the wealthy. The fact remains that if they paid more taxes after a 50 per cent rate than they did after a 70 per cent rate, their marginal-rate income had somehow to go up at least 40 per cent. A $200,000 income taxed at 70 per cent had to become at least $280,000 taxed at 50 per cent. And that’s not all. Their pretax income went up at least 40 per cent. But their after-tax income jumped 233 per cent, from $60,000 to $140,000 (and under the new tax law will jump again -to $190,000 or more).

Peterson is a great sleight-of-hand artist. He wants us to keep our eyes on the taxes paid, and not notice the jump in disposable income. This is the way multimillionaires are made. As the tax rate was cut, there came a great leap forward of executive salaries and perks, of lawyers’ fees and doctors’ fees, of tax shelters and arbitrage deals, of interest rates and capital gains. These leaps account for the tax collections Peterson celebrates. There weren’t any million dollar-a-year ballplayers before the cut, and few others with that kind of income. By 1985 (the latest figures in Statistical Abstract of the United States) there were some 17,000 Americans in that fast-growing class. As Phil Rizzuto would say, that’s not too shabby.

On another level, it’s very shabby indeed. For if Peterson is right in his figures even though vague in his reasons, the maxitax cuts gave enormous gifts to the wealthy and nibbled away at the incomes of everyone else. Now, I’m going to throw a lot of figures at you to show you what’s happened in the past 10 years, and I beg you to be careful how you use them. They come from Economic Report of the President, 1988. Some are in 1986 dollars, some in 1977 dollars, and some in current dollars, but within each category the figures are comparable.

First, remember the poor. In 1977 there were 5.3 million families, or 31.7 million people, living in poverty. By 1986, the numbers had risen to 7 million and 34.6 million, respectively.

Next, look at average weekly nonagricultural, nonsupervisory earnings (1977 dollars). In 1977 they were $189.00 and had fallen to $169.28 by 1987. The average annual earnings of the lucky ones who worked a 52-week year were $9,828 and $8,802, respectively. The 1977 figure was slightly above the poverty level, the 1987 figure considerably below it. Of course, those who didn’t work full time didn’t do so well.

Then consider the median family income (1986 dollars). This was marginally up, from $28,966 in 1977 to $29,458 in 1986 (latest figures available). Note that a two-earner family, working full time, wouldn’t come close. Finally, consider the after-tax income of the median families (this is where the wealthy shone like burnished gold). In 1986 dollars it fell, from $25,443 in 1977 to $24,095 in 1986. When you include the increase in Social Security taxes (largely engineered, as aforesaid, by Peterson), the fall was much greater.

In short, from 1977 to 1986, poverty was up a third; weekly earnings were down 10.4 per cent; the median income was up 1.7 percent; but the after-tax income of the median family was down 5.3 per cent. And the after-tax incomes of the wealthy more than doubled. This is what Peterson and his ilk are fighting for. They profess to be very worried about the deficit and are ready even to admit that it grew because of the tax cuts. But they don’t propose to give up those cuts. No, they want us to put all that behind us. They want us to look ahead to a sales tax (which they call a consumption tax), because such a tax falls very little on them but very much on the middle class, especially the lower middle class, and on the poor.

I think these people know very well what they do.

The New Leader

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THE OTHER DAY, in talking about profit maximization and utility maximization, we refrained from referring to their common, everyday name, which is “greed.” Conventional economics says that producers are profit maximizers and consumers are utility maximizers. We let it go at that and examined some of the logical implications of those propositions (” Serving Two Maximizers,” NL, March 7). Today, we’ll look at a few more.

Ivan Boesky was not so picky. He once told the graduating class of a California college that it’s good to be greedy. Most people shrink from such bravado, especially now that Boesky’s stock market activities have forced him to take early retirement. But economists are made of sterner stuff and will, if pressed, admit and even insist that economic agents are greedy. Since everyone is some kind of economic agent-a producer or a consumer or both-they are saying that everyone is greedy. I think that is manifestly untrue.

There are three possible resolutions of the issue. The most popular is to forget all about it. (This is the way ordinary people and ordinary economists handle hard questions.) The second is to claim that, whether or not people really are greedy, they act as if they were. (Even though this is the type of approach favored by Milton Friedman, it gets us nowhere because it raises the same questions of fact: Does Sister Teresa really act as if she were greedy”) The third way is what is known in mathematics and in economics as partial analysis.

Many years ago when I took Latin (it would be an exaggeration to say that I studied it), I was charmed by the grammatical construction with the silly-sounding name of “ablative absolute.” One of the most famous of these is ceteris paribus–other things being equal. The phrase is invoked so frequently by economists that they often drop in its abbreviation ritualistically, as a Tibetan monk spins a prayer wheel. “Cet. par.,” they will say, and go about their business. What they are doing is holding unchanged all except one of the factors of a situation or equation, and then varying that one to see how it affects the outcome or solution.

To laymen it often looks as though economists were simply shadowboxing, because other things generally are not equal; but partial analysis is a perfectly legitimate procedure, and in the majority of economic problems the only procedure. It is used all the time in business, as a means of assigning costs to different parts of an operation, deciding which advertising pitch pulls best, and so on.

On the greed question partial analysis merely tells us that, other things being equal, people want more of whatever it is they want. Moreover, cet. par., people want more money because, cet. par., money is the means of getting whatever people want (even if the best things in life are free). Thus Mother Teresa,

who may be perfectly altruistic and scornful of anything for herself, may, other things being equal be eager for more money to support her charitable causes. She won’t compromise her beliefs to get that money, but cet. par.-that is, putting those beliefs aside-she’ll go for it. And I, holier than thou though I may be, am the same.

None of this is to say that Mother Teresa is greedy, or that I am or that you are. We may sometimes act out of self-interest, just as the most depraved miser may sometimes act altruistically. Other things being equal-all contrary considerations aside-the miser would be happy to be a benefactor of his fellow-men, or some of them.

The same sort of reasoning applies to every honorable or dishonorable activity you can name. Aside from things I will not or cannot do, I’d rather be rich than poor (I hear that rich is better). I’d also like to be an internationally respected philosopher and a better bird watcher, have a better second serve, and (in my less wary moments) be Vice President of the United States. All of these motives are true under the partial analysis rule, and they are no less true than the fact that I am greedy.

Unfortunately, we’ve proved too much. Greed can be established as a universal motive under the partial analysis rule, and only thus, but every sort of motive-including contrary motives -can likewise be established.

It would be a weak and erratic economics that would be based on my second serve; yet one based on greed is in principle no better. Both can show what people do on certain assumptions; the assumptions are valid, cet. par., and so are the showings. It may be contended that some of the assumptions-the second-serve postulate, for example-have trivial consequences. But who knows? It was not until two millennia after Euclid that the implications of the parallel-line postulate began to be understood. Scientists properly insist that knowledge is good in itself, regardless of its apparent usefulness. The partial analysis rule seems to leave us in a world without form, a world where anything goes.

The first thing to notice about any motive is that it implies a value judgment. A motive is not like a physical force, which acts willy-nilly; a motive is diffuse and impotent without a value judgment. Rich is better; benefiting one’s fellow-men is better; a winning second serve is better. The value judgment is certainly personal. I opt for being rich; you may judge otherwise. But it does not stop there. I cannot become rich without enlisting your support or at least your forbearance. Nor can I benefit my fellow-men if they are unwilling (there are even people who don’t read this column). And my second serve is meaningless unless you are across the net lunging desperately as it slices abruptly away. I can’t even improve my golf game unless someone maintains the course[1]. Consequently, a motive including, of course, the economic motive- must be defined in the light of a value judgment that cannot be merely personal but has to be social as well. So we come to ethics and public policy.

Economic questions cannot be posed except in ethical terms. It can be said (other things being equal) that a reduction in the supply of oil will cause an increase in its price. The effects of the increase can similarly be traced throughout the economy; and on the basis of these studies policies can be proposed and analyzed-taxation, subsidization, nationalization, conservation, or perhaps laissez-faire. It may even be assumed that the economic agents involved will act, cet. par., to maximize their gains in the short run. But the choice among policies will not turn on the relative extent of these gains, either individually or in the aggregate. The choice will turn on the national purpose, which is an ethical question and a historical question.

WE AMERICANS have a tendency – often a dominant tendency – to confuse national purpose with short-term profit maximization. Perhaps the frankest statement of that confusion was Calvin Coolidge’s “The business of America is business”; but a fat anthology could be made of similar statements, both earlier and later. It would make dispiriting reading. Happily, a larger anthology could be made of inspired documents that we all, including Coolidge and his admirers, recognize as the symbols of our democracy.

It is further true that there are some questions we will not submit to the market for answers. We will not buy our battle tanks from the Soviet Union, no matter how cost effective they are. We may import golf carts from Poland, but we will not buy howitzers from Czechoslovakia, even though the Skoda works has solid experience and an unexcelled reputation. We will not contract with China to supply us with Silkworm missiles made to our design and specifications, although we could thereby save half or more of the cost.

We are clear-headed enough on that level, but badly confused elsewhere, more confused now than we were a few years ago. We see that the procurement of battle tanks is not, fundamentally, a question of short-term profit maximization. How long before we see that the so-called social issues are not such questions, either? In this connection John Maynard Keynes wrote, “But, chiefly, do not let us overestimate the importance of the economic problem, or sacrifice to its supposed necessities other matters of greater and more permanent significance. It should be a matter for specialists-like dentistry. If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!”

Professor Frank Hahn of Cambridge replied by referring to the title of Keynes’ book and noting “the singular lack of dentists who have written ‘general theories.”” Every dentist I’ve known face to face has been full of general theories and has told me about them, but Hahn’s point is well taken, as Keynes surely would have agreed. Economics is concerned with more than the price of oil.

Partial analysis can do nothing with the big questions. It is all very well to say that, cet. par., everybody is greedy. But it is very bad to conclude that the encouragement of greed is the proper objective of public policy. The big questions are ethical and historical. Whether full employment, for example, is a proper objective of public policy is an ethical question. What full employment is – should children be counted, should women, should blacks, should braceros, should strikers-is a historical question, and one whose answer has changed mightily since World War II and is still changing. This is the way it is with what we say finally matters.

The New Leader

[1] Those who knew the author are aware that this is the least of the reasons he could not improve his golf game….

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WITH THE EXCEPTION of philosophy, all disciplines start with assumptions. I’ll be glad to discuss the exception with anyone who wants to stay after class. For now, let’s concentrate on two assumptions of economics as it is generally taught and understood. The first is that economic producers are profit maximizers. The second is that economic consumers are utility maximizers. Sometimes these assumptions are explicitly stated, as by mathematical economist Gerard Debreu, and sometimes they are accepted as too obvious to warrant discussion, as by Frank Hahn, another mathematical economist. On the other side a considerable literature exists questioning their realism. Given the enormous range and variety of what people do, not to mention the comparative effectiveness of those doings, it is argued that the multitudinous actions cannot all be examples of profit maximization. It is similarly said that the different ways we spend our money – certainly idiosyncratic, frequently wasteful and occasionally counterproductive – suggest that utility maximization is an idea without much real content.

Personally, I see much merit in those objections; yet I also see force in the rejoinder that it would be irrational not to try to maximize profit or utility, as the case may be. If you can get more of either, why shouldn’t you? Indeed, since maximum profit comes from the most efficient use of scarce resources, can it not be said that you have a duty to seek it? After all, this is the way Adam Smith’s invisible hand seduces selfish behavior into producing public good. Nevertheless, I’m going to demonstrate that the whole scheme is inescapably fallacious.

For look at me, a profit-maximizing man. Not only am I clever, bold and ruthless; not only do I stretch the law as far as it will go in my favor (but no farther); not only do I push my employees to the limit and deal as sharply as I can with my suppliers and my customers; not only am I admired and feared as a keen and tough competitor-beyond these delightful qualities I am necessarily a workaholic. As long as there’s another dollar-another penny-to be made, I am after it, not like a hawk (I have no time for soaring), perhaps like a weasel.

If there’s no way to squeeze more out of my regular employment, I go moonlighting; and when I finally fall into bed, I lie awake a long time scheming ways to increase my profit tomorrow.

Unfortunately, I never get to enjoy my winnings. I’m too busy. If I were to relax a moment, a main chance might pass me by. Literature is full of monsters like me. Dickens would have had to shut up shop if he hadn’t had such people to write about.

Literature is full of utility maximizers as well-charming wastrels who live a life of endless pleasure. Women are supposed to be enchanted by them. Until very recently, women were themselves supposed to live such lives. As Thorstein Veblen saw it, only when women were successful at this utility maximizing did their profit-maximizing husbands enjoy any utility-albeit a derived utility -from the profits they piled up.

So we have a conflict. A profit maximizer has to forgo utilities for lack of time. And unless a utility maximizer can manage to be supported by someone else, he (or she) will not have resources necessary to pay for possible pleasures.

No producer is only a producer, and very few besides children, the senile and the infirm are only consumers. Since producers are consumers too, they must be both profit maximizers and utility maximizers, and that is impossible. Can we narrow the situation down and say that an economic agent is a profit maximizer when he is producing and a utility maximizer when he is consuming? Then we must ask why he is producing at this moment instead of consuming. Why is he moonlighting instead of gazing at the moon? If he has a job, he has no doubt accepted the responsibility of maximizing profits at certain hours of the day, but why did he take the job? Why not emulate Henry Thoreau? After all, Thoreau was an exemplary producer: Goods he created still yield profits and utilities, all over the world, a century and a quarter after his death.

An obvious modification of the scheme calls for utility maximizers to do their best subject to the restraint of their wealth, while profit maximizers are clearly subject to the limitation of their abilities and their luck. Even an incompetent man may be a workaholic, however, and consequently unable to enjoy the utilities available to one of his status, while a remittance man may steal enough time from his pleasures to make a little profit for himself, just for fun. Thus the proposed constraints are, if precise, limited to a single case; or if they are vague enough to be general in application, they are also so general in implication that no useful inference may be drawn.

This conclusion is not merely a rhetorical flourish. Translate your thoughts into mathematics (as you must to get ahead as an economist these days) and you will reach the same conclusion very quickly. For each assumption requires that a variable be maximized, and the variables are assumed to be independent. But you can’t simultaneously maximize two independent variables-except by happenstance. If they are always maximized together, they are not independent: One is a function of the other, or both are a function of some third. In the present case, if the variables are not independent, neither are the assumptions.

One of them (perhaps both) must go. A sure way to screw up your mathematics is to make a lot of assumptions that are not necessary. The situation here, though, is not like that of Euclid’s parallel-line postulate, which was not provable from the other postulates. The parallel- line postulate led to our familiar, four-square, no nonsense geometry which is perfectly valid in its domain. The economists’ assumptions, in contrast, are mutually contradictory and lead only to confusion.

It is not surprising, therefore, that in practice economists tend to forget one assumption or the other. Jeremy Bentham, the founder of utilitarianism, based his system on the “principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question.” In our time, the producer is more likely to be emphasized.

But forgetfulness of one assumption or shifting of emphasis will not do. Conventional economics is sustained by the tension between supply and demand, and they are, in turn, determined by maximization.

IT SHOULD BE noted that the appropriate tension is not provided by the “minimax” of game theory, where any economic activity has a single objective and the problem is to find the best combination of possible gain with the related possible loss. Various solutions to the problem may be proposed and investigated, but they will all be ranked on a single scale. In the case of profit maximization and utility maximization, there are two scales; and even if it could be maintained that, say, for every action, the value on one scale is the reciprocal of the value on the other, the theory would still provide no basis for picking the best combination.

The problem is indeterminate, and without mathematical solution, as we have seen it to be illogical and without reasonable solution. These are no mere quibbles; they go directly to the heart of conventional economic theory. Nor is appeal here being made to the realism or unrealism of the assumptions. Although such empirical appeal is not without validity, it is not being made here. Our appeal is to logic. Any theory that is illogical at the start will be illogical forever after. GIGO, as the computer people say.

And it has to be acknowledged that a great deal of garbage is in fact spewed out in the form of economic talk. Consider the arguments for privatization, for revenue-neutral taxation, for ubiquitous deregulation, for indifference to industrial pollution. These all turn on the axiomatic nature of profit maximization. Consider, next, the arguments for free trade, for unrestrained competition, even for the right (as proposed by some flaky Harvard pseudo-philosophers) to decide the specific functions of government one will support with one’s taxes-and how much. These all turn on the axiomatic nature of utility maximization. So the assumptions are not innocent.

But if we have to give up those two assumptions, what becomes of economics? Let’s look again at the reason for the failure of the assumptions. They seemed fair enough until we recognized that a profit maximizer must be a person, that a utility maximizer must be a person, and that in the vast majority of cases profit maximization and utility maximization must both be done by the same person at the same time.

In short, persons are, as my old boss W.W. Norton used to say, the absolute sine qua non. Economics is concerned with the maintenance of persons, not simply as biological entities, but as responsible agents-that is, as doers, as actors. Since the actions of one person involve others, they have an ethical aspect. The actual first assumption of economics, then, is that it is a division of ethics. It is the division of ethics that concerns money. On this rock a system can be erected whose orientation is quite different from that of the pseudo-science resting fallaciously on profit and utility maximization.

The New Leader

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ANOTHER BUDGET deadline has come and gone and that old devil deficit is still there. What can we do about it? First, we had better consider briefly what would happen if Gramm-Rudman- Hollings were successful in getting the annual deficit down to zero. For we’d have a crashing depression, that’s what would happen. Whether the miracle were achieved by reducing military expenditures or by cutting off the poor or by raising taxes or by all three, somehow $160 billion (more or less) would be abstracted from the economy.

Actually, “abstracted” is the wrong word. The $160 billion would not be taken from the spendthrift government and put in your thrifty pocket to be used in a more propitious time. No, all that lovely money would not exist. Moreover, the possibility of its existence would be gone forever, and with it the goods and services the money might have bought, plus the goods and services that might have been bought by those who would have earned money by producing the first lot, and so on ad infinitum. R.F. Kahn‘s multiplier works both ways.

Or look at it this way: One hundred and sixty billion dollars is about 4 per cent of our gross national product. The average fall in GNP for depressions since World War I has been about 6 per cent. The possibility is more ominous when you consider the unemployment rate. In 1929, the rate was 3.2 per cent. Today, it is officially stated to be 5.9 per cent-and this counts part timers as fully employed, and doesn’t count at all those who are too discouraged to look for work. In other words, we have a head start on any depression we decide to bring about.

Mention of unemployment reminds us of the real point: The vice of depression is not the loss of potential goods and services but the loss of jobs and self-respect. No one can spend much time in the labyrinths of a shopping mall without concluding that we already have more goods and (perhaps) services than we-literally-know what to do with. Our basest beggars are in the poorest thing superfluous. Personal dignity and self-respect depend on the right to contribute to the common wealth. Even without a depression too many of us are denied that right. We are all demeaned by that denial.

Does this mean we are doomed to run deficits forever? Won’t all that debt bring double-digit inflation back again? And isn’t it irresponsible to pass on to our children the consequences of our fecklessness?

When you look at the record, you wonder how these staples of campaign oratory and editorial punditry get taken seriously. In 1980, the deficit was $73.8 billion (or 2.7 percent of GNP), and the gross Federal debt was $914.3 billion (or 33.47 per cent of GNP); the inflation rate was 12.4 per cent. Last year the deficit was $220.7 billion (or 5.2 per cent of GNP), and the gross Federal debt was $2,132.9 billion (or 50.68 per cent of GNP); the inflation rate was 1.1 per cent. There is no way these figures can be tortured to support the claim that a deficit causes inflation (see editor’s chart below).

Well, the states balance their budgets, so why can’t the Federal government? Of course, it could-provided we accepted one of two outcomes: Either private businesses and private individuals would have to increase their indebtedness to match the Federal decline, or we would have to have that depression. The reason for this is simple: The flip side of debt is credit, and credit is money. (If you want to be fussy: not all credit is money, but all money is credit.) Without debt, no credit; without credit, no money; without money, no business. That’s the way the capitalist system works. That’s the golden-egg-laying goose that myopic conservatives want to kill.

But what about our children and theirs? As Keynes observed, it is no favor to our children to neglect our natural and civic and domestic environments and thus save our children from the perils of indebtedness in their adulthood at the expense of forcing them to spend their childhood in squalor.

The foregoing merely suggests ways in which the anti-indebtedness argument is false. It does not claim that the present is the best of all possible worlds, that the level of our current deficit is exactly right, that we might not better buy different things with our money, or that we might not do better by financing the deficit differently.

Let it be said at once that the appropriate level of the deficit is a matter of trial and error. In spite of the most sophisticated programs run on the most powerful computers, Pandora’s box remains closed to us. Consequently, to say that we can fine tune the economy is an exaggeration. It is, however, a fact that we have, in the record of the past 40 years, proof that some kind of tuning can have significant results.

This brings us to the probability that at some time-perhaps tomorrow, perhaps the day after-we may want to tinker with the new tax law we hailed so proudly only yesterday. We may, in any case, want to remind ourselves that taxation is not necessarily for revenue only. Attending a debate in the Academy of Laputa[1], Lemuel Gulliver was struck by a proposal “to tax those qualities of body and mind for which men chiefly value themselves …. The highest tax was upon men who are the greatest favorites of the other sex; and the assessments according to the number and nature of the favors they have received, for which they are allowed to be their own vouchers …. But, as to honor, justice, wisdom and learning, they should not be taxed at all; because they are qualifications of so singular a kind that no man will allow them in his neighbor, or value them in himself.”

That excellently bitter proposal is not explored in the 291-pageDescription of Possible Options to Increase Revenuesrecently prepared by the staff of the Joint Committee on Taxation with the staff of the Committee on Ways and Means. Part I examines what it discreetly calls” Revenue Areas [it would be lese majeste to call them tax increases] Addressed by the President’s 1988 Budget Proposals.” Adopting all of them would increase 1988 revenues by about $3.7 billion-scarcely noticeable in the shadow of a $160 billion deficit. Part II, taking up the document’s remaining 257 pages, examines “Other Possible Revenue Options,” most, if not all, having been suggested by members of the Committee on Ways and Means. These naturally reflect the various members’ interests and capabilities, and many are nutty (as are some of the President’s), while others are politically impossible, at least for now. Though it is likely that, as a whole, they exceed the magic $160 billion goal, there is no point in adding them up because many of them would work at cross purposes, and because nowhere in the pamphlet is there a discussion of the leading weakness of the 1986 tax law.

This weakness is the almost complete abandonment of progressivity. The great strength in the new law is that the grossest shelters were blown down. But, as is well told in Showdown at Gucci Gulchby Jeffrey H. Birnbaum and Alan S. Murray, the Senate Finance Committee grudgingly accepted the strength in order to achieve the weakness.

The attack on progressivity has been going on for several years. It was not so long ago that the top bracket in the personal income tax was 85 per cent. Then it was reduced to 50 per cent on “earned income.” Then to 50 per cent on all income, except for capital gains, which were taxed up to 35 per cent. Then capital gains were dropped back to 20 per cent. And now the top rate is 28 per cent across the board, with a complicated proviso that need not be of concern to you unless your taxable income exceeds $200,000. (The proviso, allowing for certain deductions at the lowest rather than at the highest rate, was one of the few good ideas of the original Bradley-Gephardt proposal. See “A Cautionary Tale of Tax Reform,” NL, January 27,1984.)

HOPE OF CHANGING the tax law’s rate of progressivity was abandoned by everyone who entered the Congressional conference rooms. It was insisted from the start-by Bradley-Gephardt in 1983 as well as by Reagan- Regan in 1986- that a reformed tax law would be revenue neutral. This shibboleth meant not merely that the total revenue raised under the new law would be the same as that under the old, but also that the various quintiles of income recipients would pay the same proportions of the total tax under both laws. An exception was that certain of the poorest of the poor, who had been added to the rolls in the reactionary surge of 1981-82, would now be dropped again.

The new law is certainly better than the old in that whatever is unreasonable or unjust in it is plainly stated rather than shoddily sheltered. But that is not to say it is more reasonable or just. It may, in fact, lead to greater injustice. It is probable that throughout the corporate world executives will demonstrate an increased eagerness for high salaries because they will be able to keep a higher proportion of them. It is probable, too, that the kind of investment banking that leads to raids and takeovers and greenmail will be stimulated, and that so will the securities and commodities and futures markets. It is even probable that the changes in the corporation tax will encourage many companies to increase executive perks, on the ground that the tax collector would get the money if it weren’t spent on limousines and Lear jets.

It will be noticed that the foregoing probabilities are to some degree contradictory. It is something of a paradox that lower personal and higher corporate taxes can be expected to result in both higher executive salaries and perks as well as higher winnings from speculating in the securities of the companies whose earnings are reduced by paying the salaries and perks.

This can happen all at once through an accentuation of the polarization of the American economy. The rich can become richer by keeping the poor in their place and by pushing more of the middle class down to join them. The trend can continue for a damnably long time without arousing much political reaction. The possibility of an economic reaction is more immediate. As Jean Baptiste Say, in one of his acuter moments, wrote, “There is nothing to be got by dealing with people who have nothing to pay.”

Our economy is bad because our morale is bad. For too many years, greed has been admired in high places and doing good has been sneered at. A steeply progressive income tax would be a sign of a shift in morale-which would be far more important than whatever increased revenue might be raised, and vastly more important than the size of the deficit.

The New Leader

[1] Readers with a bent for trivia may recall that one of the targets of Major Kong’s B-52 in the movie “Dr. Strangelove” was Laputa. According to IMDb, “Major Kong’s plane’s primary target, is an ICBM complex at Laputa. In Jonathan Swift‘s 1726 novel ‘Gulliver’s Travels’, Laputa is a place inhabited by caricatures of scientific researchers.”

In all the current talk, business ethics has come in for special attention, and many an editorial has proposed required ethics courses in business schools. Lester C. Thurow, the new dean of MIT’s Sloan School of Management, resists the idea on the ground that the blight, if any, goes much too deep to be reached by a tacked-on series of lectures or bull sessions. Morals, he says, should have been learned at home and in the community long before graduate school. I resist the special course idea, too, but on the ground that if students have been learning bad ethics or no ethics, it is because they have been taught bad economics.

Economics used to be called an ethical science, an expression that resonates oddly in our ears. Come to think of it, our term, “social science,” gives off similar vibrations. Social relations surely have an ethical aspect (if it exists at all), while the propositions of the natural sciences (what we think of as proper science) do not. There is nothing moral or immoral about the solar system, or about the way electrons bond, or even about AIDS. Morals may be – most often certainly are – involved in the transmission of AIDS, but the physiology of the disease is neither right nor wrong. Indeed, it is only because the disease is a natural phenomenon that there is any hope of containing or curing it. Even the calls for sexual abstinence must depend on the fact that the disease obeys natural laws and is neither a random accident nor a supernatural visitation.

“Nature to be controlled,” as Francis Bacon said, “must be obeyed.” Thus disease control (which is a human end) uses medicines (which are natural means). Thus engineers use the principles of physics to achieve their ends. The ends are not natural, but the means are. It is frequently argued that economics presents a parallel situation. In 1874, Leon Walras, in his Elements of Pure Economics, distinguished at considerable length between economics as an ethical science, which considered what ought to be done; economics as an art, which taught how to do it; and economics as pure science, which described how it worked. Toward the close of the century, a similar tripartite analysis was made by John Neville Keynes (John Maynard’s father). In our day, Milton Friedman, perhaps indulging a puckish humor, has quoted favorably from the senior Keynes’ work.

The parallel between physiology or physics on the one hand and pure economics on the other is, however, false. There is no such thing as pure economics. Physiology and physics can be studied – must be studied – without regard to the willful act of any individual or group of individuals. But no antiseptic event of that kind occurs in economics. Walras, whose work was hailed by Joseph Schumpeter as “the only work of an economist that will stand comparison with the achievements of theoretical physics,” opened his analysis, after a long introduction, with the observation, “Value in exchange, when left to itself, arises spontaneously in the market as the result of competition.” But this pure proposition is immediately corrupted by willful humanity: “As buyers, traders make their demands by outbidding each other. As sellers, traders make their offers by underbidding each other.” (Walras’ emphases.)

Without those traders making their demands and offers, there is no economics, pure or applied. With those traders, economics becomes inextricably immersed in questions of morals. I do not mean merely that trade is impossible unless traders abjure fraud (at least up to a point), although certainly this is true. What I mean is that demands and offers – the fundamental elements of “pure” economics – are not acts of God or events of nature but acts of human beings who necessarily define themselves by what they do, including what they do in the marketplace. Perhaps more to the point: Demands and offers can be understood only as acts of will.

There has been no lack of attempts to develop other explanations, and they form the division of economics known as “value theory.” Prices are determined by the reconciliation of demands and offers, and demands and offers are said to be determined by values. There are three leading explanations of value. The first, found prominently in Adam Smith and Karl Marx, holds that things become valuable commodities in accordance with the amount of labor that goes into their production. The second, advanced by Jeremy Bentham, argues that only useful things are valuable, and that utility derives from the promotion of pleasure or the avoidance of pain. The third, credited by Leon Walras to his father Auguste, founds value on rareté, a combination of scarcity and utility.

All these explanations turn out to have exceptions. The labor theory cannot explain why a house in the Houston suburbs that sold for a quarter of a million dollars only yesterday can be bought for half that price today and will sell for a different price tomorrow. The utility theory cannot explain why proprietary drugs are more expensive than their generic equivalents. The simple scarcity theory cannot explain why gem-quality diamonds are more expensive than bluebird nests. Put them all together in the rareté theory, and you still can’t explain why baseball stars are paid in the millions of dollars and croquet experts have to pay to enter tournaments.

Of course, the problem of the exceptions has not gone unnoticed. The typical solution turns on a relaxed definition of utility. Proprietary drugs, for example, may be said to be more useful to some people because they carry an implicit guarantee of quality and so enhance satisfaction and pleasure or suppress apprehension and pain. The greater perceived utility naturally results in a higher price.

But see what has happened. The utility theory, like all the theories, was introduced to provide an objective foundation to value. Bentham intended his “felicific calculus” to be the equivalent of Newton’s laws of motion. In reality, though, it is highly subjective. Some people are pleased by drugs’ brand names and some are pained by the higher prices. Bentham himself summed up the situation in an aphorism: “Quantity of pleasure being equal, pushpin is as good as poetry.” One man’s pleasure is another man’s pain. Utility is what each individual says it is; it has none of the universality of gravity.

IRONICALL Y, the consequence was noted by William Stanley Jevons, a leader in developing Bentham’s utilitarianism into the modern quasi mathematical theory of marginal utility. Calling for increased efforts to collect economic statistics, he wrote, “The price of a commodity is the only test we have of the utility of the commodity to the purchaser …. ” And, he might have added, of its utility to the seller, too. Price may be explained by utility, but all we know of utility is price.

The other value theories are no less circular. Marx, recognizing that a lot of labor can go into producing positively harmful commodities, avers that “socially useful” labor makes value. So it is not labor that is the test of value; it is value that is the test of labor. The tree is known by his fruit. Walras’ rareté also leans on the weak reed of utility, as well as on scarcity.

The only way to keep a circular argument from chasing its tail is not to let the chase get started. Let us, therefore, return to the men and women who did the price-paying of Jevons, the offering and demanding of Walras, and the laboring and social evaluating of Marx. Who are these essential people? As Pogo might say, we have met them, and they are us.

The various value theories we have mentioned each try to make us into passive agents controlled by the economic counterpart of nature. Even perfect competition (the state imagined to provide perfect liberty) requires everyone to be what is called a “price taker.” Prices are then said to be made by the market.

Those who quarrel with the idea of perfect competition tend to do so on the ground that competition never is and never has been perfect. That is true enough, but the reason for this is that the notion of an impersonal market that sets prices is a pathetic fallacy.

Farmers are the standard textbook examples of price takers, unable to influence the price of what they sell, whether they produce more or less, and whether they sell now, or later, or never. Yet if all producers and all consumers – that is, all human beings – are price takers, where do prices come from? Only cynics claim that the individual voter is insignificant because he or she is merely one among tens of millions. The republic will not collapse if I fail to vote; it will collapse if no one votes. It is the same with economic agents. Someone has to set a price, or there is no price system and no economics. An economy of passive agents is a contradiction in terms.

Economics is one of the modes of ethics. Pure economics – economics without people and hence without ethics – is a myth. Morality can’t somehow be tacked onto economic affairs, which otherwise are amoral. Ethics is there at the beginning, or it is not there at all. It is always there because there is no economics that does not concern human acts, and all human acts are acts of will. What is true of economics, the theory of business enterprise, is obviously true of business itself. Business ethics is not merely the proposition that honesty is the best policy. The ethical question, in business and everywhere, is, What sort of person am I? There is no escaping it. That question is posed by everything I do.

I hasten to put on the record that I am not now and never have been a member of the Catholic Church. I admit that, once upon a time when the world was young and I was 12, I was received as a member by the State Street Congregational Church of Portland, Maine; and I recognize that there is a sense in which all of us in the West are Christians, just as we all are also Jews, Greeks, Romans, and Visigoths. But as to theology, it’s been a long time since I was even agnostic.

So I approached the bishops’ letter warily. I would not have approached it at all if it hadn’t been attacked by George Will, William E. Simon, and William F. Buckley Jr. Anything hated by these people can’t be all bad. And, in fact, I found it a fascinating document. Let me quote:

“Every economic decision and institution must be judged in the light of whether it protects or undermines the dignity of the human person.”

“All people have a right to participate in the economic life of society …. For it is through employment that most individuals and families meet their material needs, exercise their talents and have an opportunity to contribute to the larger community.”

“We cannot separate what we believe from how we act in the marketplace and the broader community, for this is where we make our primary contribution to economic justice.”

“In some industries the mobility of capital and technology makes wages the main variable in the cost of production. Overseas competitors with the same technology but with wage rates as low as one-tenth of ours put enormous pressure on U.S. firms to cut wages, relocate abroad or close. U.S. workers and their communities should not be expected to bear these burdens alone.”

“The investment of human creativity and material resources in the production of weapons of war makes these economic problems even more difficult to solve.”

“Minimum material resources are an absolute necessity for human life. If persons are to be recognized as members of the human community, then the community has an obligation to help fulfill these basic needs unless an absolute scarcity of resources makes this strictly impossible. No such scarcity exists in the United States today.”

“Social justice implies that persons have an obligation to be active and productive participants in the life of society, and that society has a duty to enable them to participate in this way.”

“The concentration of privilege that exists today results far more from institutional relationships that distribute power and wealth inequitably than from differences in talent or lack of desire to work.”

“As individuals and as a nation we are called to make a fundamental ‘option for the poor.’ “

“The ‘option for the poor’ is not an adversarial slogan that pits one group or class against another. Rather, it states that the deprivation and powerlessness of the poor wounds the whole community.”

“Basic justice … recognizes the priority of policies and programs that support family life and enhance economic participation through employment and widespread ownership of property.”

“The economy is not a machine that operates according to its own inexorable laws, and persons are not mere objects tossed about by economic forces.”

“The dignity of workers also requires adequate health care, security for old age or disability, unemployment compensation, healthful working conditions, weekly rest, periodic holidays for recreation and leisure, and reasonable security against arbitrary dismissal.”

“We firmly oppose organized efforts, such as those now regrettably seen in this country, to break existing unions and prevent workers from organizing. Migrant agricultural workers today are particularly in need of the protection, including the right to organize and bargain collectively. U .S. labor law reform is needed to meet these problems as well as to provide more timely and effective remedies for unfair labor practices.”

“It is unfair to expect unions to make concessions if managers and stockholders do not make at least equal sacrifices.”

“Large corporations and large financial institutions have considerable power to help shape economic institutions within the United States and throughout the world. With this power goes responsibility and the need for those who manage it to be held to moral and institutional responsibility.”

“Business and finance have the duty to be faithful trustees of the resources at their disposal. No one can ever own capital resources absolutely or control their use without regard for others and society as a whole.”

“Widespread distribution of property can help avoid excessive concentration of economic and political power. For these reasons ownership should be made possible for a broad sector of our population. “

“Support of private ownership does not mean that anyone has the right to unlimited accumulation of wealth.”

“Governments must provide regulations and a system of taxation which encourage firms to preserve the environment, employ disadvantaged workers and create jobs in depressed areas. Managers and stockholders should not be torn between their responsibilities to their organizations and their responsibilities toward society as a whole.”

“The risk of inflationary pressures resulting from expansionary policies is very real. Our response to this risk, however, must not be to abandon the goal of full employment, but to develop effective policies that keep inflation under control.”

“We recommend increased support for direct job creation programs targeted on the long-term unemployed and those with special needs.”

“Across the nation, in every state and locality, there is ample evidence of social needs that are going unmet. Many of our parks and recreation facilities are in need of maintenance and repair. Many of the nation’s bridges and highways are in disrepair. We have a desperate need for more low-income housing. Our educational systems, day care services, senior citizens services and other community programs need to be expanded. At the same time there are 8 million Americans looking for productive and useful work.”

“The nation should renew its efforts to develop effective affirmative action policies that assist those who have been excluded by racial or sexual discrimination in the past.”

“In comparison with other industrialized nations, the United States is among the more unequal in terms of income distribution. Moreover, the gap between rich and poor in our nation has increased during the last decade.”

“We believe Congress should raise the minimum wage in order to restore some of the purchasing power it has lost due to inflation.”

“Diversity and richness in American society are lost as farm people leave the land and rural communities decay.”

“We continue to support a progressive land tax on farm acreage to discourage the accumulation of excessively large holdings.”

“We are dismayed that the United States, once the pioneer in foreign aid, is last among the 17 industrialized nations in the Organization for Economic Cooperation and Development in percentage of gross national product devoted to aid.”

“Rather than promoting U.S. arms sales, especially to countries that cannot afford them, we should be campaigning for an international agreement to reduce this lethal trade.”

“In our 1919 Program of Social Reconstruction we observed that ‘the full possibilities of increased production will not be realized as long as the majority of workers remain mere wage earners. The majority must somehow become owners, at least in part, of the instruments of production.’ “

THERE IS nothing in the passages I have quoted – and, aside from some theology, very little in the pastoral as a whole – that constant readers have not read in this space, perhaps somewhat less solemnly expressed. This is what disturbs me about the document. My instinctive response is to follow the Ben Hecht-like film writer in Boy Meets Girlwho, when seconded in skulduggery by a pompous producer, responds by snarling, “Stay off of our side, B.G.”

Why do I respond in this way? Well, for one thing, the Catholic Church in America has a long record of association with illiberal causes. As prime examples, I think of the Legion of Decency (which tried to censor Faulkner, among others), the holding of Federal aid to education for ransom (until outmaneuvered by President Lyndon Johnson), and the continuing world-wide opposition to birth control. Somehow, causes like these have been enthusiastically nurtured by the Church, while liberal causes, like the astonishing 1919 call for employee ownership, have tended to be stillborn.

Then there is the issue of the separation of church and state. This issue has been raised for their purposes by Catholic laymen who disagree with the bishops. James J. Kilpatrick, writing for the Universal Press Syndicate, climaxes his diatribe with a citation (obligatory in such polemics) of Edmund Burke’s Reflections on the Revolution in France and concludes ungraciously: “The bishops know the workings of the marketplace by hearsay; they themselves, living well fed and protected lives, are as innocent as kittens of economic risk and insecurity. When they involve the church in lobbying for changes at the World Bank and the IMF, all in the name of moral instruction, they trespass upon the boundary that wisely separates the pulpit from the political arena.” Instinctively I find the argument of his final clause congenial. And yet…

And yet there is nothing in the First Amendment that forbids clergymen of whatever persuasion from speaking their minds on any matter whatever. (If you argue that churches engaging in politics should lose their tax exemptions, I counter that all churches should lose their tax exemptions.) Furthermore, for years a standard charge against the Catholic Church in Latin America was that its silence on social questions in effect supported political and economic repression.

What is truly dangerous – what absolutely corrupts the democratic process – is one-issue politics, such as the current Right-to-Life movement. “Economic Justice for All” is not a one-issue document. The public press has given it less attention that it deserves. I fear that the bishops’ parishioners, too, have passed by on the other side. They know not what they do.

The New Leader

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BACK IN ONE of my early columns I threatened to say something about Marx’s theory of surplus value, and today I’m going to do it. If we keep our voices down, we may be able to make a few observations before the comrades accuse us of not commanding the literature and the Birchites accuse us of thinking.

Marx’s argument, stretching over Parts III, IV and V of Capital, turns on the notion that “The value of a day’s labor-power amounts to … the means of subsistence that are daily required for the production of labor-power. …” This is the exchange-value of labor-power and is what the worker is paid. But the use-value, or what the capitalist gets out of it, is very much greater (Marx usually estimates double), and the difference between the two is the surplus value the worker creates that the capitalist appropriates.

You will see at once that Marx has mixed apples and oranges. His workers sell their services at cost (apples), while his capitalist sells the product for whatever the market will bear (oranges). If both services and product were sold at cost, there would be no surplus value. If both services and product were sold at the market price, competition would theoretically force them back to cost, and again there would be no surplus value.

Competition doesn’t work as it is famed to do (see “Unthinkable Thoughts on Competition,” NL, April 2, 1984). In fact, today in the United States the sum of proprietors’ income, personal rental income, and personal dividend income is about 10 per cent of total personal income. (Were we to include personal interest income, the figure would jump to about 25 percent. From the point of view of an entrepreneur, though, interest is an expense, not part of a surplus. On the other hand, a large but undeterminable portion of proprietors’ income should be classified as wages rather than profit.)

Marx’s difficulty, which he shares with all economists of a materialist or realist persuasion, is that he wants to consider everything except cost as some unreal flim-flam. And he particularly wants the capitalist’s property to be a thing – a machine you can touch or land you can walk on.

Yet property is not and never has been a thing. It is, instead, a bundle of rights (see “Life, Liberty and Property,” NL, July 11-25, 1983). Different societies emphasize different bundles. Thus in the ancient world the household (the paterfamilias or patron, his family, his clients, his slaves) was the locus of power. Property was personal – by persons and in persons – and aspects of that arrangement survive to this day. In the medieval world, military power also a survivor – became crucial. In the early modern world, the factory came to the fore, and at present we are ruled by finance.

These distinctive emphases are close to what Marx meant by the modes (as distinguished from the means) of production. Although his need to see always in materialist terms skewed his analysis, he was insightful in recognizing that each society’s characteristic form of property engrosses the special rewards of the society and is protected by its legal and political organization. For this reason he noted at the start ofthe Grundrisse that J. S. Mill and his predecessors were wrong in claiming that an economy’s production of goods and consumption of goods are two different (and ahistorical) questions.

And for this reason he attacked Ferdinand Lassalle and the Social Democrats, who advocated “a fair distribution of the proceeds of labor.” InCritique of the Gotha Program [Marx] replied: “Any distribution whatever of the means of consumption is only a consequence of the distribution of the conditions of production …. The capitalist mode of production, for example, rests on the fact that the material conditions of production are in the hands of non-workers in the form of property in capital and land, while the masses are only owners of the personal condition of production, of labor-power. If the elements of production are so distributed, then the present day distribution of the means of consumption results automatically.”

There was a time – roughly the time of Marx’s life – when the material means of production did indeed dominate society. Factories were in the field (as Carey McWilliams said) as well as in buildings with smokestacks. Today, though the factories still exist, the ruling power is finance. The current observation, that we are moving from a production economy to a service economy, is true but superficial. There are no special rights attaching to service; there is, in our society, a special and encompassing bundle of rights attaching to finance, to money. Marx said money was a “purely ideal or mental” form of value. It certainly is, but it is not therefore imaginary or secondary or part of some sort of superstructure. This ideal form of value is now the ruling bundle of rights in our society. The owners of this bundle derive therefrom their claim to be entitled to the special rewards of the system.

Every system generates special rewards – rewards that go beyond what is necessary for the system’s day-to-day operation. How these surpluses are used is a question in macroeconomics (for a clear explanation thereof, I refer you to Profits and the Future of American Society by S. Jay Levy and David A. Levy). Why these surpluses are generated is a question in microeconomics.

More than that, it is a question in the philosophy of history. Since there is a present (otherwise, what are we doing?), there are both past and future, from which the present is distinguished. Whatever else you say about the future, you must say it is constitutionally unknowable. As Keynes concluded in his Treatise on Probability, “we simply do not know.” If we could know the future, it would then be the same as the present and the past.

A consequence of the unknowability of the future is the generation of surpluses or windfalls or profits. These cannot be contracted for (as wages and interest are); they are what is left over after all expenses are paid. Because what’s to come is still unsure, we can face the future with confidence only if we have sufficient resources to meet any eventuality. But what is sufficient for any eventuality is more than enough for most eventualities; and what is, most of the time, more than enough, becomes the surplus that every system generates if it is to survive.

Thus in the Middle Ages, the military power required to keep the peace in a given valley was much less than that needed to defend the valley from outside marauders. Yet even though the marauders appeared infrequently, the lord undertaking the valley’s defense had to have more than enough power for ordinary use. This surplus power took the form of a stronger and more magnificent castle, more and better equipped retainers, more impressive ceremonial displays, occasional forays to defend the domain by pushing its borders outside the limits of the valley, dynastic alliances with strategically placed peers … All of these emblems of power were at the same time the characteristic luxury or surplus goods of the society, and were exclusively enjoyed by those who wielded the power in the society.

SUCH INFLUENCE of the unknowable in our lives is pervasive. Thomas Hobbes saw it as the fear of death, which leads to “a perpetual and restless desire of power after power. And the cause of this,” he wrote, “is not always that a man hopes for a more intensive delight than he has already attained to, but because he cannot assure the power and means to live well … without the acquisition of more.” Or as Fritz Fischer has shown in a series of groundbreaking books, the leaders of pre-World War I Germany saw their options as “world power or decline.”

Likewise, it is often said that a business firm must expand or wither away. Even if it wants to stand pat, it cannot precisely anticipate its future business and so may find business booming and profits burgeoning. Alternatively, there is the risk that sales will be down and profits negative. Prudence dictates at least a defensive expansion – a drive for a larger market share, introduction of a new product, whatever. In any case, if expansion does result, its benefits accrue exclusively to the owners of the enterprise. It is an extra dividend or a capital gain.

The owners do not, however, necessarily accept the possible losses. The first sufferers are the firm’s workers, whose pay is cut, and some of whom are fired. Aside from the firing, it was not different for the underlings of an unsuccessful medieval lord. They were squeezed to rebuild the lord’s power, and this was reasonable because the lord – and the lord alone – maintained the peace. Without him there was anarchy, sometimes savagery. In the same way, without an ongoing enterprise, the workers have no jobs at all.

We are back in a familiar bind. If things turn out well, the owners of an enterprise get capital gains and other surplus or unearned income. If things turn out badly, the workers get fired. These outcomes are not inherent in any system, but the problem is inherent in every system, because it is inherent in life itself. The obvious solution is to unify society and make owners and workers the same people. Socialism does this, up to a point, but the dictatorship of the proletariat – that is, of the party – shows no sign of withering away. What is left? Well, if you have paid attention to previous lectures, you know that the answer is some form of employee ownership.